Academic journal article Asian Social Science

The Effect of Audit Firm Size on Independent Auditor's Opinion: Conceptual Framework

Academic journal article Asian Social Science

The Effect of Audit Firm Size on Independent Auditor's Opinion: Conceptual Framework

Article excerpt


Independent auditor's opinion enhances the confidence of investors in the reporting system and leads to an increased in capital markets efficiency. Thus, the effectiveness and quality of opinion developed by the auditor about the financial statements is significantly important, because financial statements should be reliable, useful and relevant for investors and creditors. A significant issue frequently raised in the accounting literature is whether judgments of auditors from large firms vary substantially from those of auditors employed by other firms. Then past researchers attempted to find the relationship between the size of company and auditor's opinion and its quality. Review on the literature revealed that the size of firm can not affect auditor's opinion but this survey found that some factors such as experience, education, skills and employee competence may have influence on quality of auditors and their opinion. This paper has categorized these views under special category of capital known as human capital. Thus, the study anticipates improvement in the relationship between audit firm's size and independent auditor's opinion by introducing human capital as a mediator variable.

Keywords: audit firm's size, human capital, independent auditor's opinion

1. Introduction

Small firms and regulators have argued that the quality of audit should not only be judged on the basis of the size of large public accounting firms as dictated in the disclosure of audit standard on independence of audit quality from auditor firm size (DeAngelo, 1981). DeAngelo (1981) rejected this allegation of small firms and revealed that big audit firms have more independence and higher quality in their audit work. Furthermore, Francis and Yu (2009) noted that large audit firms have more intention to detect material problems in financial statements.

Big audit firms will have the potential to lose their clients if they become notorious, have lower audit quality and show a lack of independence in their judgment. Hence, these issues lead to high motivation for improving audit quality. Scholars indicated the positive relationship between firm size and auditor quality (Cheng et al., 2009). In conformity with Francis and Wilson (1998) and DeFond (1992), the reputation of audit firms is very important for audit partners.

In the international scenario, scholars have explored the judgment of auditors in CPA international firms as large firms in comparison with the auditor's judgment in regional and local firms as medium and small companies (AICPA, 1978; Frishkoff, 1970). The Derieux Committee Report stresses the 'concern that smaller firms may be replaced simply because they are less well known, even though the smaller firms may well be providing as high or higher quality services. In this condition, users cannot rely on accounting information and auditing reports (DeAngelo, 1981). DeAngelo also noted that large audit firms are more independent in terms of audit revenue, therefore, the qulified opinion is more probable.

2. Background

A prominent researcher in auditing and accounting area, DeAgelo (1981) examined the impact of size of auditor firms on the quality of audits. The research took AICPA international firms, medium and small firms as sample. The author found that auditor quality is associated with audit firm size.

Wright (1983) investigated the influence of size of CPA firms on auditor's judgments in preferences of disclosure. In this experimental study, size of CPA firms was important for reliability of auditor's report. Two types of audit firms were studied, national or regional and local CPA firms. The author collected information about client power of association, firm's size and growth from financial statements. The result of the study showed significant differences in preferences of disclosure, for example auditors who work in national firms like to put some comments for adjustment while auditor who work in local firms preferred footnote for disclosure. …

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